* Global banks have been under review since February
* Downgrades likely priced into stocks
* Ratings cuts could increase funding costs and spur collateral calls
By Rick Rothacker and Steve Slater
LONDON/CHARLOTTE, N.C., June 21 Ratings agency Moody's downgraded many of the world's biggest banks on Thursday, lowering credit ratings of 15 companies by one to three notches.
Morgan Stanley, one of the most closely watched firms, had its long-term debt rating lowered by just two notches, one level less than had been expected, and its stock rose in after-hours trading. The downgrade left Morgan Stanley more highly rated than Bank of America Corp and Citigroup but a step below Goldman Sachs Group.
Credit Suisse, which last week was warned about weak capital levels by Switzerland's central bank, was the only bank in the group to suffer a three-notch downgrade. But its new A1 deposit and senior debt ratings, however, rank higher than many of its peers.
Financial markets have been bracing for the credit rating actions since February, when Moody's Investors Service said it had launched a review of 17 banks with global capital markets operations. These companies face diminished profitability and growth prospects due to difficult operating conditions, increased regulation and other factors, Moody's said.
The long-term debt ratings cuts could increase funding costs for Morgan Stanley and other banks, and trading partners may ask for more collateral. But the impact could be muted since the changes were in-line with indications given by Moody's in February on how much the rates were likely to be cut.
"The biggest surprise is the three-notch downgrade of Credit Suisse, which no one was looking for," said Mark Grant, managing director at Southwest Securities Inc. "In fact, it was Morgan Stanley that was supposed to be downgraded by that amount and Morgan received only two notches of cuts."
In a statement, Morgan Stanley said its ratings "still do not fully reflect the key strategic actions we have taken in recent years," adding: "With our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders."
Citigroup also reacted sharply, saying it "strongly disagrees with Moody's analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted."
Royal Bank of Scotland said the ratings change was "backward-looking and does not give adequate credit for the substantial improvements the Group has made to its balance sheet, funding and risk profile" but called the action manageable.
Bank stocks fell on Thursday as investors prepared for an announcement, which leaked to the market as Moody's informed banks that it was coming, according to sources.
Morgan Stanley shares declined nearly 1.7 percent to $13.96, while Bank of America shares fell nearly 4 percent to $7.82. The KBW Banks Index was down 2.3 percent.
But after suffering only a two-notch cut, instead of three as anticipated, Morgan Stanley shares rose about 3 percent in after-hours trade.
In addition to Morgan Stanley, downgraded by two notches were Barclays, BNP Paribas, Royal Bank of Canada, Citigroup, Goldman Sachs Group, JPMorgan Chase , Credit Agricole, Deutsche Bank, and UBS.
Falling one notch were Bank of America, HSBC Holdings , Royal Bank of Scotland and Societe Generale .
Nomura and Macquarie were included in an original list of global banks, but have already been downgraded.
Moody's acknowledged that the lowest-ranked banks have been making changes to improve their profits, but said it is taking a wait-and-see attitude.
"These transformations are ongoing and their success has yet to be tested," Moody's said in its announcement. Banks Moody's put in this group were Bank of America, Citigroup, Morgan Stanley and Royal Bank of Scotland.